Journal of Applied Corporate Finance
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VOLUME 31 NUMBER 3 SUMMER 2019 Journal of APPLIED CORPORATE FINANCE IN THIS ISSUE: Columbia Law School Symposium on Corporate Governance “Counter-Narratives”: On Corporate Purpose and Shareholder Value(s) Corporate 10 Session I: Corporate Purpose and Governance Colin Mayer, Oxford University; Ronald Gilson, Columbia and Stanford Law Schools; and Martin Purpose— Lipton, Wachtell, Lipton, Rosen & Katz LLP. 26 Session II: Capitalism and Social Insurance and EVA Jeffrey Gordon, Columbia Law School. Moderated by Merritt Fox, Columbia Law School. 32 Session III: Securities Law in Twenty-First Century America: Once More? A Conversation with SEC Commissioner Rob Jackson Robert Jackson, Commissioner, U.S. Securities and Exchange Commission. Moderated by John Coffee, Columbia Law School. 44 Session IV: The Law, Corporate Governance, and Economic Justice Chief Justice Leo Strine, Delaware Supreme Court; Mark Roe, Harvard Law School; Jill Fisch, University of Pennsylvania Law School; and Bruce Kogut, Columbia Business School. Moderated by Eric Talley, Columbia Law School. 64 Session V: Macro Perspectives: Bigger Problems than Corporate Governance Bruce Greenwald and Edmund Phelps, Columbia Business School. Moderated by Joshua Mitts, Columbia Law School. 74 Is Managerial Myopia a Persistent Governance Problem? David J. Denis, University of Pittsburgh 81 The Case for Maximizing Long-Run Shareholder Value Diane Denis, University of Pittsburgh 90 A Tribute to Joel Stern Bennett Stewart, Institutional Shareholder Services 95 A Look Back at the Beginning of EVA and Value-Based Management: An Interview with Joel M. Stern Interviewed by Joseph T. Willett 103 EVA, Not EBITDA: A New Financial Paradigm for Private Equity Firms Bennett Stewart, Institutional Shareholder Services 116 Beyond EVA Gregory V. Milano, Fortuna Advisers 126 Are Performance Shares Shareholder Friendly? Marc Hodak, Farient Advisors 131 Why EVA Bonus Plans Failed—and How to Revive Them Stephen F. O’Byrne, Shareholder Value Advisors VOLUME 31 NUMBER 3 SUMMER 2019 IN THIS ISSUE: Corporate Purpose—and EVA Once More? 2 A Message from the Editor 4 Executive Summaries Columbia Law School Symposium on Corporate Governance “Counter-Narratives”: On Corporate Purpose and Shareholder Value(s) 10 Session I: Corporate Purpose and Governance Colin Mayer, Oxford University; Ronald Gilson, Columbia and Stanford Law Schools; and Martin Lipton, Wachtell, Lipton, Rosen & Katz LLP. 26 Session II: Capitalism and Social Insurance Jeffrey Gordon, Columbia Law School. Moderated by Merritt Fox, Columbia Law School. 32 Session III: Securities Law in Twenty-First Century America: A Conversation with SEC Commissioner Rob Jackson Robert Jackson, Commissioner, U.S. Securities and Exchange Commission. Moderated by John Coffee, Columbia Law School. 44 Session IV: The Law, Corporate Governance, and Economic Justice Chief Justice Leo Strine, Delaware Supreme Court; Mark Roe, Harvard Law School; Jill Fisch, University of Pennsylvania Law School; and Bruce Kogut, Columbia Business School. Moderated by Eric Talley, Columbia Law School. 64 Session V: Macro Perspectives: Bigger Problems than Corporate Governance Bruce Greenwald and Edmund Phelps, Columbia Business School. Moderated by Joshua Mitts, Columbia Law School. 74 Is Managerial Myopia a Persistent Governance Problem? David J. Denis, University of Pittsburgh 81 The Case for Maximizing Long-Run Shareholder Value Diane Denis, University of Pittsburgh 90 A Tribute to Joel Stern Bennett Stewart, Institutional Shareholder Services 95 A Look Back at the Beginning of EVA and Value-Based Management: An Interview with Joel M. Stern Interviewed by Joseph T. Willett 103 EVA, Not EBITDA: A New Financial Paradigm for Private Equity Firms Bennett Stewart, Institutional Shareholder Services 116 Beyond EVA Gregory V. Milano, Fortuna Advisers 126 Performance Shares: Shareholder Unfriendly? Marc Hodak, Farient Advisors 131 Why EVA Plans Have Failed—and How to Revive Them Stephen F. O’Byrne, Shareholder Value Advisors A MESSAGE FROM THE EDITOR uring my nearly 40 years as editor, this journal has been devoted to exploring the idea D that public companies should be run to maximize their own long-run value. However much you may have been persuaded by the Business Roundtable’s recent statement that the idea has outlived its usefulness, it received a pretty remarkable show of support in an event that took place at Columbia Law School early this year—and that provides the main focus of this issue. by Don Chew The event, which was nicely designed and themselves—or be required by law—to to enforce such statements of purpose, he orchestrated by Jeff Gordon and Kristin publish statements of corporate purpose expresses concern about the political risks Bresnahan at the law school’s Millstein that envision some greater social good associated with ever-more concentrated Center—and included an opening than maximizing shareholder value. And to ownership of public companies in a world statement by Ira Millstein himself—was carry out that purpose, he urges companies where populist distrust of all concentrations billed as a symposium on “Corporate to make continuous investments of their of wealth and power is clearly on the rise. Governance Counter-Narratives: On financial and other resources in developing But even more troubling for the Corporate Purpose and Shareholder their human, social, and natural capital— companies themselves is the confusion Value(s).” The occasion and organizing and also to account, quite literally, for such proposals are likely to create in focus were provided by publication of Colin such investments in much the same way corporate boardrooms. As Gilson points Mayer’s book, Prosperity—Better Business they now keep track of their investments out, corporate managements face not one, Makes the Greater Good. in physical capital. Although the author but two hugely costly ways of putting their Mayer himself, well-known corporate appears to prefer that such change be own interests ahead of their shareholders.’ finance and governance academic, and enacted through new legislation and One is the much cited problem of myopia inaugural dean of Oxford’s Said School of enforced by regulators and the courts, or short-termism, whose most common Business, launched the first of the five sessions his main energies are directed at enlisting form is underinvesting in the corporate with a 30-minute address that, without notes, the support of today’s largest owners of future to boost near-term earnings. (But slides, or AV equipment of any kind, issued a corporations, many of which—particularly if short-termism gets a lot of attention flawlessly articulate and stirring call for a “rad- wealthy founding families, institutional during the conference, Harvard Law’s ical reinterpretation” of what corporations are shareholders, and sovereign wealth funds— Mark Roe provides little if any support for supposed to do. The corporation, as Mayer are already favorably predisposed to ESG its existence or consequences in reviewing starts by pointing out, from its beginnings initiatives. the studies.) The other big problem, seldom 2,000 years ago in the Roman Empire until In their responses to Mayer, both the discussed these days, is what Gilson calls the rise of serious shareholder activism in the world’s most famous corporate lawyer, hyperopia, or overinvestment designed early 1980s, has combined commercial activi- Marty Lipton, and distinguished Columbia to preserve (low-return) growth and ties with a public purpose. But since Milton and Stanford law professor, Ron Gilson, the status quo. (And in the article that Friedman’s famous pronouncement in 1970 begin by suggesting that mandating such immediately follows the five Columbia that the social goal of the corporation is to changes is neither desirable nor feasible. sessions, University of Pittsburgh’s Dave maximize its own profits, the gap between Lipton, after praising Mayer’s proposals Denis provides a nicely compact review the social and private interests served by cor- and noting much common ground with his of three decades of research suggesting porations appears to have grown ever wider, own New Paradigm, also views the support that overinvestment is by far the more helping fuel the global outbreaks of populist of large shareholders as critical, and efforts widespread of the two problems.) protest and indictments of capitalism that fill to secure it as the most promising strategy. And as Gilson goes on to argue, perhaps today’s media. Gilson, on the other hand, sees a number the most challenging, and important, In Mayer’s vision, the boards of of major challenges to this approach. Apart responsibility of boards is achieving the all companies will either take it upon from the courts’ inability or unwillingness right balance in guarding against these two 2 Journal of Applied Corporate Finance • Volume 31 Number 3 Summer 2019 value-destroying tendencies—failure to social programs—especially protections for own long-run efficiency and value—that invest in the future, and failure to return workers and the unemployed—have been would be appropriate for, and end up capital to investors that will be wasted on put into practice by Northern European satisfying, all their different stakeholders. unproductive investment. Gilson’s answer to social democracies, the Judge responds “Who,” she asks, “would make the trade- the problem is simple:“better management,” to the more extreme demands of today’s offs among competing priorities when the as exemplified